The Asia Pacific Initiative, an independent think tank, recently published the results of its Economic Security Survey that covered 100 Japanese companies that play an essential role in national economic security and are susceptible to changing economic security dynamics.
The survey’s findings identify many issues that the government must carefully consider when advancing economic security policies.Three clear points emerged from the survey results:
First, the companies surveyed view the rivalry between the U.S. and China as the greatest source of geoeconomic risk. Some 75% of respondents cited uncertainty in U.S.-China relations as their greatest risk, and 60% noted that U.S.-China tensions had negatively impacted their business in some way. The 100 companies surveyed are highly dependent on American and Chinese markets: 64% reported that the U.S. made up 10% or more of sales, while 49% reported the same of China.
Both the U.S. and China have issued successive restrictions on foreign trade and investment. If a global company observes U.S. sanctions against China, it will be punished by China for violating China’s anti-foreign sanctions law. But the opposite is also true, leaving Japanese companies in an increasingly precarious position. Thirteen percent of survey respondents indicated they already find themselves caught in the middle due to U.S.-China tensions.
Japanese companies are keenly aware of the fact that the China risk is both long-term and far-reaching. Respondents’ concerns regarding business expansion in China included: business survival risk due to changes in Chinese government policy (76%); data breaches and information leaks, including technological information (66%); geopolitical risk (64%); the growth of competitors in China (63%); the Chinese government’s tightening restrictions on foreign investment (52%); and cyberattacks (52%). Around 89% of companies reported that the Chinese government had already required them to transfer technology (in some fashion); of these, 33% transferred technology as requested.
Yet even as Japanese companies prepare for these types of economic security risks from China, they report that, for now, U.S. policies toward China are actually the more pressing concern. This is a second key finding of the survey. When asked about their concerns regarding expanding business in the U.S., respondents cited: supply chain disruptions (48%); intensification of U.S. exclusion of Chinese companies (47%); difficulty in forecasting U.S. medium- to long-term policy toward China (46%); geopolitical risk (39%); and increased costs due to supply chain reorganization, production transfer, etc. (28%).
Above all, respondents are extremely wary of the tightening of regulations by the U.S. Of the companies that reported the U.S.-China conflict has had a negative impact on business, 60% identified U.S. restrictions as the source of that impact — far more than the 34% citing China’s tightening of regulations. Some 8% of respondents had in fact been identified by the U.S. for importing, exporting, or dealing with sanctioned companies in the past.
Third, the survey results highlight the dilemma of Japanese companies who may wish to reduce their dependence on the Chinese market, but are unable to consider relocating their production base to Japan or a third country. While 14% of respondents indicated they would like the government to support (through subsidies) the establishment of new supply chains in countries other than China (Southeast Asia, etc.), 33% also replied that increasing their ratio of sales in China was a medium- to long-term goal, and 17% indicated their goal was to maintain the current sales ratio. Not a single company listed decreasing the ratio of sales in China as a medium- to long-term goal.
Japanese companies are beginning to treat economic security as a critical management issue. Some 85% of respondents said that economic security was an agenda item at company board meetings or other venues where management policy is discussed. And 87% said they were currently making some effort to address the issue of economic security.
The Japanese government has also stepped up its efforts by establishing the new post of economic security minister, but these government initiatives, which center upon the management of foreign trade and investment, have a strong supervisory bent. Economic security, however, ought to be strengthened through a combination of defensive and offensive tactics.
The API survey asked companies to list their top priority agenda items for making the most of Japan’s strengths to advance economic security. The top four replies were: maintaining Japan’s competitive advantage in manufacturing (35%); maintaining domestic political stability and a peaceful international environment (29%); Japan’s leadership and trust in the Asia-Pacific (19%); and maintaining and strengthening the U.S.-Japan alliance (7%). The Japanese government should listen carefully to these replies.
Finally, companies were asked what they expected from the Japanese government (in terms of future economic security policy). The three highest priorities were: clarification of policy direction (47%); policy making decisions made with corporate profits in mind (19%); and support for a return to domestic production through subsidies (9%).
Expectations for the Japanese government’s new economic security minister included international cooperation that establishes economic security without over-relying on domestic resources and adopting a stance that avoids showing bias to either the U.S. or China.
How can the Japanese government align economic security policy with other national policies pertaining to diplomacy and security, trade and investment, energy and decarbonization, digital and data-related activity or industrial policy?
This overarching policy direction remains unclear. Japan must implement a policy that clarifies the cost-effectiveness of domestic production and import substitution, national security and corporate profits, economic growth and innovation, disparity and deterrence, as well as resilience.
In short, what Japan needs is smart economic security.
Yoichi Funabashi is chairman of the Asia Pacific Initiative and a former editor-in-chief of the Asahi Shimbun. This is a translation of his column in the monthly Bungei Shunju.
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